Qantas cuts won’t kill off the competition

Alan Joyce
’s latest gamble to ensure
Qantas
has a future is brutal but necessary.

It also won’t change the fact that Australia’s open aviation market means the airline will continue to struggle to compete with its more nimble and lower-cost rivals.

An unprecedented deluge of competition is now the biggest challenge facing the airline since privatisation and Qantas is in retreat.

The drastic measures Qantas announced on Thursday will not be enough to address the structural issues facing the airline, or make its nimble and numerous competitors go away.
Photo: Bloomberg

The Emirates alliance has not yielded the results expected at a lavish launch party last year, with the airline’s international division no longer expected to break even next year. Jetstar Asia’s growth plans are on ice and key routes to Singapore have been cut or downsized.

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While the first-half loss was at the lower end of Qantas’s guidance, the losses at the international business were worse than expected.

There will be no backing away from its struggle to maintain its domestic market share at 65 per cent though.

The brand damage from Qantas’s public lobbying to gain some sympathy from Canberra about its plight and now the deep job cuts which could extend to more than 7000, once you account for part-time and casual positions, has been enormous.

Joyce has scored a victory of sorts by getting the government to agree to guarantee the airline’s debt and get the ball rolling for the removal of its foreign ownership restrictions, but this may come at a price.

His message is clear though. It is time for drastic measures. He cites a 46 per cent increase in capacity by competitors on international routes since 2009, Virgin Australia’s shareholder base, rising fuel prices and a softening resources market for the targeted cost savings.

As expected, Qantas has also agreed to sell the lease on its terminal at Brisbane Airport, netting the airline $112 million. The best thing about the deal for Qantas though, is that it resolves a spat between the airline and the airport over how to fund a new $1.3 billion runway. Qantas has been refusing to pay up front for the parallel runway, which would not be completed until 2020.

There were few surprises in Qantas’s announcement or any radical proposals, although other options such as floating Frequent Flyer remain on the table. The cost cuts are brutal but Qantas is playing catch up to what British Airways and American Airlines did a decade ago.

The worst-case scenario is that it becomes another Pan American, which gradually sold off its profitable businesses before collapsing in 1991.

The focus now will be on Joyce’s future and whether the latest restructure will be enough for him to keep his job. When asked about his future, Joyce said: “I’m absolutely committed to Qantas."

It was not quite a straight answer but there are no signs he is going anywhere just yet. Qantas’s institutional shareholders are not baying for his blood and he has no natural internal successor.

But the measures announced on Thursday largely revolve around cost cutting and shrinkage. Qantas is trying to address the things that it can control, but they will not make its nimble and numerous competitors go away.